2019 (2) TMI 696 - AT - Income Tax

Income Tax Tribunal cancels PCIT's order under Section 263, finding assessment not erroneous or prejudicial.

The Tribunal held that the Principal Commissioner of Income Tax's initiation of proceedings under Section 263 was not justified as the assessment order ... Revision u/s 263 - Unrealized Mark to Market losses - Held that:- For invoking the provisions of section 263 of the Act, the twin tests of the order being both ‘erroneous’ and ‘prejudicial to the interests of Revenue’ have to be satisfied. If we examine the issues raised by the CIT in the impugned order u/s 263 of the Act and the reasoning given therein, in our view, it is fairly clear that the above two tests are not satisfied in these cases. As regards the issues related to ‘Forex Loss due to Mark to Market Losses’ and ‘Prior Period Expenditure’ are concerned, the grievance of the CIT is that these are not disallowed while computing ‘Book Profits’ u/s 115JB of the Act. Since there is no provision u/s 115JB for addition of “Forex Losses” OR “Prior Period Expenditure”, such disallowances/additions are not tenable under the law and the CIT cannot issue directions to make additions/disallowances which are not allowed under the law. In our considered view, as the twin conditions of an erroneous order and prejudicial to the interest of Revenue are not satisfied on both disallowances in respect of “Forex Losses” and “Prior Period Expenditure”, therefore the impugned order of the CIT was wrong. ‘Non-deduction of tax at source on payments for purchase of software’, the fact that this issue has been taken up before the AAR and the application has been admitted is borne out by the details on record. As per the provisions of section 245RR of the Act, no Income Tax authority or Appellate Tribunal can proceed to decide any issue in respect of which an application has been made before the AAR u/s 245Q (1) of the Act. This applies to and includes, inter alia, both AO and the CIT. This being the case, in our considered view, the CIT’s action in directing the AO to decide the issue in a particular manner is not in accordance with law. As regards the issue of verification of “provision for doubtful debts and advances” and the quantum of bad debts written off, evidently, the details thereof are on record and reflected in the financial statements and computation of income. CIT has not made out a case to demonstrate that the AO has not conducted any enquiry and as the details were available on the face of the return of income, the conclusion can be that the AO has examined the issue and accepted the details filed by the assessee. It is settled legal principle that the assessee can write off its debts in any year of its choice, provided that the said amounts were offered to tax earlier and if such amounts or part thereof are recovered at a subsequent date, it shall be offered to tax in that year. We also observe that the AO in order u/s 143(3) r.w.s. 263 of the Act dated 19.12.2016, giving effect to the directions issued by the CIT in the impugned order for computing the book profits u/s 115JB of the Act, has examined the issue again and allowed the deductions claimed by the assessee. In that view of the matter, the twin conditions precedent; of the order being erroneous and prejudicial to interests of Revenue have not been satisfied. The issues on which the CIT has invoked the revisionary jurisdiction u/s 263 of the Act is untenable in the eyes of law as in our view no case has been made out that the order of assessment passed u/s 143(3) of the Act dated 26.03.2014 for Assessment Year 2010-11 is erroneous and prejudicial to the interest of Revenue on any of the issues raised by the CIT in the impugned order. In this view of the matter, we hold that the action of the CIT in invoking the provisions of section 263 of the Act to be untenable and therefore cancel the impugned order of the CIT passed u/s 263 of the Act on 30.03.2016 for Assessment Year 2010-11.- Decided in favour of assessee. Issues Involved:1. Initiation of proceedings under Section 263 of the Income Tax Act.2. Addition of Mark to Market (MTM) loss to book profits.3. Addition of prior period expenses to book profits.4. Disallowance of depreciation claimed on outright purchase of software under Section 40(a)(i) for non-deduction of taxes at source.5. Verification of provision for doubtful debts and advances.Detailed Analysis:1. Initiation of Proceedings under Section 263 of the Act:The Principal Commissioner of Income Tax (PCIT) initiated proceedings under Section 263, claiming the assessment order dated 26.03.2014 was erroneous and prejudicial to the interests of Revenue. The assessee contended that the order was neither erroneous nor prejudicial, citing judicial precedents, including the Supreme Court's decision in Malabar Industrial Co. Ltd. v. CIT, which postulates that both conditions must be satisfied for Section 263 to be invoked.2. Addition of Mark to Market (MTM) Loss to Book Profits:The PCIT directed the addition of MTM loss to book profits, arguing it was not an ascertained liability. The assessee countered by asserting compliance with Accounting Standard 11 and referenced judicial precedents that MTM losses are not notional or contingent. The Supreme Court's ruling in Apollo Tyres Limited v. CIT was cited, emphasizing that the Assessing Officer (AO) must accept the accounts certified under the Companies Act without probing further.3. Addition of Prior Period Expenses to Book Profits:The PCIT directed the addition of prior period expenses to book profits, stating such addition is not contemplated under Section 115JB. The assessee argued that Section 115JB is a complete code and no adjustments beyond those specified can be made. The Supreme Court's decision in Apollo Tyres Limited v. CIT was again referenced, supporting that the AO cannot alter the book profits except as provided in the Explanation to Section 115JB.4. Disallowance of Depreciation on Purchase of Software under Section 40(a)(i):The PCIT concluded that tax should have been deducted on payments made for software, classifying it as royalty under Section 9 and the India-USA DTAA. The assessee contended that the issue was pending before the Authority for Advance Ruling (AAR), and under Section 245RR, no tax authority can decide on an issue pending before the AAR. The assessee also argued that depreciation, being a statutory allowance, cannot be disallowed under Section 40(a)(i).5. Verification of Provision for Doubtful Debts and Advances:The PCIT questioned the AO's verification of provisions for doubtful debts and advances. The assessee maintained that all necessary details were provided and examined by the AO. The Tribunal observed that the AO had allowed the deductions after due verification in the subsequent order passed under Section 143(3) read with Section 263, thereby satisfying the conditions precedent.Conclusion:The Tribunal concluded that the PCIT's invocation of Section 263 was untenable as the twin conditions of the assessment order being erroneous and prejudicial to the interests of Revenue were not satisfied. The Tribunal canceled the PCIT's order, allowing the assessee's appeal for Assessment Year 2010-11.